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Burcu Ünüvar

Director and Chief Economist, TSKB, Türkiye


Let It Commence: Strengthening Development Banks while Greening the

Monetary Policy

While the global economy has always presented a multitude of challenges, the frequency and severity of these challenges has been on the rise. In fact, Edgar Moring, a French theorist of complexity, gave us the wake-up call more than three decades ago, warning us of an impending polycrisis - and indeed, that is what we are going through.

Whether it is the energy crisis, geopolitical tensions, mass human mobility, the pandemic or global warming… economies have to adapt to sudden and sharp changes while preparing for the next one, without knowing what it will be.

Among these shocks, one in particular stands out - climate change. Living in a carbon-constrained environment with the anthropogenic climate crisis as an existential threat (Lagarde, Gaspar, 2019), greening the financial system is a priority, and central banks are no exception (Ünüvar, Yeldan, 2023).

I might have surprised a few of you with the concept of “green central banking”, but please bear with me. Climate change itself and the policies to mitigate its impacts affect the ability of central banks to achieve their mandates, whether it is price stability, financial stability or supporting growth. Indeed, surveyed by the Network for Greening the Financial System (NGFS), all the 26 central banks representing 51 countries noted that they considered climate change to be a challenge (NGFS, 2020).

Dikau and Volz (2018) refer to it as “green” when a central bank takes environmental risks, including climate change, into consideration in its actions. Although reaching agreement on the impact of climate change on central banks’ playing field is not so straightforward, agreeing on green central banking is no simple matter either, due to worries regarding “politicization” and “mission creep” (Villeroy de Galhau, 2021). Another difficulty concerns building green policies for central banks, not only due to the lack of a generally accepted green taxonomy but also the institutional differences between the central banks.

For this purpose, Baer et al. (2021) offer a useful taxonomy clustered according to policy motives and matching instruments, as exhibited in Table 1.

Table 1. Taxonomy for Green Monetary Tools

Source: Summarized by Ünüvar and Yeldan (2023) from Baer et al., 2021

The more eagle-eyed among you will notice that many of the tools in this table are within the capacity of development banks and some are already encouraged by their lending facilities. This is critical since the polycrisis of our times goes beyond climate change. Inequality, youth unemployment, the gender gap, overall societal challenges and the ecosystem crisis in the broader sense have entered policy agendas. Obviously, we have a huge “transformation” challenge that requires innovation, strategic direction and financing. Innovation requires patient long-term finance (Mazzucato, Penna, 2018) which is in line with the mission-oriented nature of the development banks.

Development banks have the capacity to speed up this transformation. For instance, in the institution I work in, TSKB (the Industrial Development Bank of Turkey) - a 74-year-old development bank - 90% of the loans are linked to the sustainable development goals. Financing some 15% of Turkey’s renewable installed energy capacity and as the country’s first carbon-neutral bank, TSKB is a major working example of the influence of a development bank. This power has the potential to grow even further if supported by green central banking practices, such as differentiated reserve requirements. Meanwhile, it should be noted that the mission-oriented lending principles of development banks already cover some of the tools presented in Table 1, such as developing climate risk assessment models and disclosure requirements.

In other words, supporting development banks which are already successful change agents will not only speed the transformation but also ease the pressure on central banks to risk their mandate concentration while going green.

With all hectic transformation agenda and the polycrisis which our world faces, let the age of development banks commence - citius, altius, fortius!


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